Correlation Between KMD and SXP
Can any of the company-specific risk be diversified away by investing in both KMD and SXP at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining KMD and SXP into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between KMD and SXP, you can compare the effects of market volatilities on KMD and SXP and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in KMD with a short position of SXP. Check out your portfolio center. Please also check ongoing floating volatility patterns of KMD and SXP.
Diversification Opportunities for KMD and SXP
Very weak diversification
The 3 months correlation between KMD and SXP is 0.56. Overlapping area represents the amount of risk that can be diversified away by holding KMD and SXP in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on SXP and KMD is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on KMD are associated (or correlated) with SXP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of SXP has no effect on the direction of KMD i.e., KMD and SXP go up and down completely randomly.
Pair Corralation between KMD and SXP
Assuming the 90 days trading horizon KMD is expected to generate 1.21 times more return on investment than SXP. However, KMD is 1.21 times more volatile than SXP. It trades about 0.1 of its potential returns per unit of risk. SXP is currently generating about 0.05 per unit of risk. If you would invest 22.00 in KMD on January 27, 2024 and sell it today you would earn a total of 19.00 from holding KMD or generate 86.36% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
KMD vs. SXP
Performance |
| Timeline |
| KMD |
| SXP |
KMD and SXP Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with KMD and SXP
The main advantage of trading using opposite KMD and SXP positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if KMD position performs unexpectedly, SXP can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in SXP will offset losses from the drop in SXP's long position.The idea behind KMD and SXP pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.Check out your portfolio center.Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Insider Screener module to find insiders across different sectors to evaluate their impact on performance.
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